Draw the graph · Macro · Loanable funds market
The government runs a deficit
Drag a curve sideways, or use its arrows. A curve you do not move is a curve you are saying stays put. Make each shift clear enough that a reader could see it.
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Demand for loanable funds shifts right. Supply of loanable funds stays put.
The government borrows in the same market as firms. Its new borrowing adds to the demand for loanable funds at every real interest rate, so demand shifts right. Saving, the supply of funds, is unchanged. The higher interest rate moves savers up along their supply curve and squeezes out some private borrowers.
The real interest rate rises and more funds are borrowed.
Common mistake. Students often shift supply left because 'the government takes funds away.' The government does not remove funds, it competes for them. That is extra demand.
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